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Rating Action:

Moody's affirms Corporacion Andina de Fomento's Aa3 and Aaa.mx rating

 The document has been translated in other languages

20 Apr 2021

Mexico, April 20, 2021 -- Moody's de Mexico, ("Moody's") has today affirmed Corporacion Andina de Fomento's (CAF) Aa3 senior unsecured global scale rating and the Aaa.mx senior unsecured national scale rating of the MXN1,300 million bond (CAF 1-12) issued in 2012. In a related action, Moody's Investors Service affirmed CAF's long-term issuer rating and senior unsecured debt rating at Aa3. The foreign-currency senior unsecured MTN program rating and the senior unsecured shelf rating were affirmed at (P)Aa3. Other short-term rating, the commercial paper and backed commercial paper ratings were affirmed at Prime-1 (P-1), while the foreign-currency short-term program rating was affirmed at (P)P-1. The outlook remains stable.

The decision to affirm the rating reflects the following key factors:

1) CAF's intrinsic financial strength remains robust with solid asset quality, robust capital buffers and liquidity, despite continued challenges from high credit risk on its loan exposures.

2) Exposure to Venezuela continues to be managed using an unconventional mechanism that reduces Venezuela's shareholding and outstanding loans.

LIST OF AFFECTED RATINGS

..Issuer: Corporación Andina de Fomento

BONDS due 28 October 2021, CAF 1-12

.... Senior Unsecured Global Scale Rating, Affirmed Aa3

.... Senior Unsecured Mexico National Scale Rating, Affirmed Aaa.mx

RATINGS RATIONALE

RATIONALE FOR THE Aa3 AND Aaa.mx RATINGS AFFIRMATION

FIRST DRIVER: CAF'S INTRINSIC FINANCIAL STRENGTH REMAINS ROBUST WITH SOLID ASSET QUALITY, ROBUST CAPITAL BUFFERS AND LIQUIDITY, DESPITE CONTINUED CHALLENGES FROM HIGH CREDIT RISK ON ITS LOAN EXPOSURES

CAF's robust intrinsic financial strength continues to reflect strong asset performance and high levels of paid in capital that underpin solid capital adequacy. Strong liquidity coverage and ample access to capital markets support Moody's assessment of CAF's robust liquidity and funding performance.

CAF's capital position has remained relatively steady over the past five years, reflecting sustained lending activity that has grown at a compound annual rate of 5.0% in 2016-20. CAF's leverage has been stable and has improved modestly over the past five years, standing at 219.7% at the end of 2020, broadly stable from 218% in 2015 and comparable to the Aa-rated median. Additional capital will be provided by incoming shareholders Costa Rica and Mexico and CAF's continuing profitability also adds to reserves and useable equity. Overall net income decreased to $239.9 million in 2020, down from $325.6 million in 2019. The decrease was largely driven by a much lower interest rate environment and its negative impact on net interest income, as well as some base effects.

One of CAF's key credit strengths has been its good asset performance despite lending to lowly-rated sovereigns. In 2020, non-performing loans (NPLs) decreased to 0.2% from 0.3% in 2019, reflecting no new NPLs combined with continued growth in CAF's lending portfolio. Deteriorating credit quality in 2021-22, as a result of a lagged pass-through from the coronavirus shock within CAF's operating region, could push non-performing assets (NPAs) higher, but Moody's expects they will remain contained. This expectation rests on Moody's assumption that even if more of CAF's borrowers face a challenging environment, they will continue to repay CAF, as they have continuously done in previous crisis situations.

Secondly CAF's liquidity cushion is an important credit support. Although its liquidity policy requires CAF to maintain sufficient liquid assets to cover at least 12 months of net cash requirements, in practice, the institution holds 24 months of net cash requirements and has done so consistently since at least 2014. The strong liquidity buffer is confirmed in Moody's own metrics, which sizes its high-quality liquid assets relative to its net outflows from uninterrupted net loan disbursements, debt repayment and administrative costs. The Bank holds enough liquid assets to sustain operations for more than 18 months.

CAF's credit profile continues to be constrained by low borrower quality (which, by design, is consistent with the institution's mandate) including its exposure to Venezuela, and a relatively high level of portfolio concentration. Borrower quality, as measured by the weighted average borrower rating, is low at caa2. This is because the majority (69%) of outstanding loans were to non-investment grade countries in 2020, and has remained relatively steady over the last five years, despite great strides in diversifying country exposure within the lending portfolio.

SECOND DRIVER: EXPOSURE TO VENEZUELA CONTINUES TO BE MANAGED USING AN UNCONVENTIONAL MECHANISM THAT REDUCES VENEZUELA'S SHAREHOLDING AND OUTSTANDING LOANS

CAF's loan exposure to Venezuela (senior unsecured C stable) represented 11.4% of the total lending portfolio, the third largest behind Ecuador (Caa3 stable) and Argentina (Ca stable), and a decrease from 2019 when it represented 13.8% of the portfolio.

In anticipation of the potential incurrence of NPLs from Venezuela, CAF approved the so-called Support Program for Liquidity Management in Exceptional Situations. The program allows CAF to repurchase Venezuela's shares in the corporation, and apply those proceeds toward debt service owed by the sovereign to CAF. By the end of 2020 the plan had reduced Venezuela's shareholding in CAF to 11.5% from just under 16% in 2019. The Program has since been closed and as such would not be available to other borrowers in distress.

Although unconventional and despite the reduction in capital and loans related to Venezuela from implementing the plan, CAF's balance sheet did not compress. This reflects CAF's continued profitability and inflow of fresh capital from the latest general capital increase program and the expansion of the membership base. Moody's anticipates that CAF will avoid a compression of its balance sheet in the coming years until Venezuela's capital has been exhausted.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Environmental considerations are not material for CAF's rating. However, Moody's note that as part of its mission, CAF has committed to increase its lending for projects that look to address or mitigate climate change risks in the Latin America region.

Social risks are not material for CAF's rating. Moody's does not expect that social risks affecting its borrowers will affect CAF's capital adequacy or liquidity.

Governance considerations are material. CAF's governance, and in particular its risk management policies and practices, are strong and in line with similarly rated MDBs.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward credit pressure on CAF's rating is unlikely, save if CAF were to meaningfully reduced its exposure to its lowest rated borrowers, decreased its leverage, and if its capitalization and liquidity ratios improved significantly. The inclusion of new highly rated non-borrowing members responsible for a significant amount of callable capital, which reduced the correlation between members and assets, would also support improved creditworthiness.

Conversely, downward credit pressure would arise if the Venezuela exposure were to cause a deterioration of asset performance due to missed payments, as it would signal the potential for material pressure on the balance sheet of the bank over a 12-18 month time horizon. Negative pressure would also develop if CAF were to face a strong deterioration in asset quality due to credit events involving other borrowers, or if it were to experience an erosion of its capital and liquidity buffers due to a rapid expansion of its loan book not sufficiently compensated for by additional capital contributions.

The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational Entities Methodology published in October 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1232238. Alternatively, please see the Rating Methodologies page on www.moodys.com.mx for a copy of this methodology.

The period of time covered in the financial information used to determine Corporacion Andina de Fomento's rating is between 31December 2018 and 31 December 2020 (source: audited financial statements).

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216309.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

The ratings have been disclosed to the rated entity prior to public dissemination.

A general listing of the sources of information used in the rating process, and the structure and voting process for the rating committees responsible for the assignment and monitoring of ratings can be found in the Disclosure tab in www.moodys.com.mx.

The date of the last Credit Rating Action was 31 March 2021.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.mx.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

This credit rating is subject to upgrade or downgrade based on future changes in the financial condition of the Issuer/Security, and said modifications will be made without Moody's de México S.A. de C.V accepting any liability as a result.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on www.moodys.com.mx for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com.mx for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see our website www.moodys.com.mx for further information.

Please see www.moodys.com.mx for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

The ratings issued by Moody's de Mexico are opinions regarding the credit quality of securities and/or their issuers and not a recommendation to invest in any such security and/or issuer.

Please see the ratings tab on the issuer/entity page on www.moodys.com.mx for additional regulatory disclosures for each credit rating.

Jaime Reusche
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 1 888 779 5833
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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